We initiate coverage on Ipca Laboratories with an overweight rating and a price target of R1,101 a share. Steadily growing India formulations, further ramp-up in anti-malarials and capacity de-bottleneck for the US should drive 23% FY14-16e EPS CAGR (vs 16.3% for MS coverage). This, with a healthy ROE (23%) relative to peers, makes Ipca our preferred healthcare mid-cap stock.
Ipca currently trades at 16.2x and 13x our FY15e and FY16e EPS, ~20-25% discount to its large-cap peers. We believe that current valuations can sustain, driven by better earnings visibility, favourable positioning compared to other India pharma mid caps and visibility of 505(b)(2) products. Our price target is 17.5x FY16e EPS.
We see robust medium-term revenue growth of 19% (vs industry mean 15%) driven by strong growth in key segments: (a) India formulations (32% share) to grow above industry average (15-16%); (b) ramp-up in anti-malarial exports (14% share) to continue; (c) US (8% share) revenues to double to US$80 million by FY16e (F13: $40 million), helped by capacity debottlenecking post Indore SEZ commercialisation.
Full backward integration supports steadily improving-to-stable margins. Ipca is the only vertically integrated WHO-pre-qualified maker of anti-malarials, as per management. In addition, Ipca is amongst the leaders globally in various APIs, and looks poised to become an end-to-end player (implying better OPM) upon further formulation approvals.
Morgan Stanley